1.22 What Are Proof-of-Stake Cryptocurrencies?
Proof-of-Stake cryptocurrencies allow users to earn staking rewards by participating in the blockchain’s transaction validation process.
There are various types of blockchains on the crypto market, but Proof-of-Work (PoW) and Proof-of-Stake (PoS) are definitely the two most popular ones.
While Proof-of-Work is mostly associated with traditional cryptocurrencies like Bitcoin and Dogecoin, Proof-of-Stake cryptocurrencies shift the focus toward decentralized applications and NFTs.
In this lesson, we’ll find out what are Proof-of-Stake cryptocurrencies, how does crypto staking work, and what are some of the most popular Proof-of-Stake coins on the market.
What Is Crypto Staking?
Besides crypto mining, which is associated with Proof-of-Work cryptocurrencies, crypto staking is another immensely popular way to earn crypto. However, unlike mining, which requires expensive mining hardware and huge amounts of electricity, crypto staking is environmentally friendly. That’s because it only requires a fraction of the electricity used by mining equipment.
Also, it’s much easier to get into crypto staking because you don’t need to own an expensive rig. You can start staking with just a few clicks through a DeFi platform, crypto exchange, or crypto wallet app that supports staking features.
Staking requires users to deposit a certain amount of a specific Proof-of-Stake coin into a staking pool, thus contributing to that specific blockchain’s daily operations. Users get staking rewards as a sign of gratitude for helping operate the network.
These rewards usually have a fixed percentage reward rate, which can fluctuate over time, depending on how many people are using a certain staking pool, and how many coins are available on the market.
Proof-of-Stake blockchains have a similar structure like Proof-of-Work chains. The network is made of data blocks that contain transaction data and the blocks for a chronological string from the first block to the most recent one.
Proof-of-Stake blockchains use a decentralized operating structure, which means that they have a huge number of network nodes that work autonomously and aren’t controlled by a single entity. The decentralized network structure ensures that no one can monopolise the blockchain and gain full control of the network.
Instead, Proof-of-Stake blockchains use decentralized governance models that usually involve the project’s core developer team, the community, and developer teams that operate decentralized apps on that specific blockchain.
Proof-of-Stake cryptocurrencies are a technological step-up compared to Proof-of-Work coins because they consume way less energy and the network is far more inclusive. Anyone can operate a network node if they meet the node requirements in terms of how many coins they need to dedicate to a staking node. Those coins are the node's stake in the network, hence the name Proof-of-Stake.
The Role of Nodes in Proof-of-Stake Blockchains
The nodes are responsible for checking the validity of all transactions on the blockchain, and ensuring only approved transactions are processed. In case a node validates a non-valid, double-spending transaction or another type of fraudulent transfer, the node loses all the staked coins.
This mechanism encourages honestly and trust among node operators because no one would want to validate a suspicious transaction and lose their assets.
Node operators get rewarded with a portion of the transactions fees, and the fees are proportionately distributed to everyone who is using a specific node to stake crypto.
Validator nodes with more staked crypto have a higher chance of getting selected by the blockchain’s algorithm for validating a transaction. This mechanism varies between different Proof-of-Stake cryptocurrencies, but it’s essentially very similar because computer algorithms decide which nodes get to verify transactions. That’s why node operators often have their own staking pools or join forces with multiple nodes for a better chance at validating traffic and receiving rewards.
How to Stake Crypto?
Staking crypto is way easier compared to mining and nowadays, there are hundreds of options when it comes to staking your crypto. Many crypto wallet providers allow users to stake certain cryptocurrencies with just a few clicks. Also, there are numerous DeFi protocols that operate staking pools for popular Proof-of-Stake cryptocurrencies.
However, although crypto staking is widely available, it’s important to understand that it isn’t without risks. DeFi protocols usually require users to deposit crypto in order to stake it, which means that the staked crypto is vulnerable to potential DeFi platform hacks. If hackers manage to breach the protocol’s crypto wallet’s, they can easily steal all the staked coins.
That’s why it’s of utmost importance to always do thorough research regarding safety and reliability before choosing a staking option.
How Secure is a Proof-of-Stake Blockchain?
Proof-of-Stake cryptocurrencies derive their safety from the blockchain’s consensus mechanism and the algorithm responsible for selecting validator nodes. The main strength of Proof-of-Stake blockchains is that hackers would need to control at least 51% of all the blockchain’s native coins to alter the contents of existing data blocks and approve fraudulent transactions.
Because of this, Proof-of-Stake blockchains are considered highly secure.
What Are Proof-of-Stake Cryptocurrencies Used For?
Just like any cryptocurrency, Proof-of-Stake coins can be used as digital cash, fit for making payments and trading on crypto exchange platforms.
However, Proof-of-Stake coins are high-utility cryptocurrencies that often allow users to do much more than just make payments. Some of the largest Proof-of-Stake blockchains are massive programming hubs that allow developers to create and launch all sorts of decentralized applications (dApps), from DeFi platforms, and decentralized exchanges, all the way to NFT markets, and blockchain games.
When used in conjunction with dApps, Proof-of-Stake coins act as the currency for all transactions and daily operations on their native blockchains. That’s why many popular Proof-of-Stake coins have a massive throughput capacity, allowing them to easily power dApps with thousands of active daily users.
Proof-of-Stake Crypto Examples
Let’s have a look at some examples of the leading Proof-of-Stake coins on the market.
Ethereum is the second-largest cryptocurrency in the world, right after Bitcoin, and for a long time since its launch in 2015, Ethereum was a Proof-of-Work crypto. However, Ethereum shifted to a Proof-of-Stake blockchain architecture in September 2022.
The Ethereum blockchain remains the largest crypto ecosystem for launching decentralized applications, with a special focus on DeFi platforms and NFTs. However, Ethereum transaction fees are the highest on the crypto market, which is one of the network’s downsides.
The Cardano (ADA) blockchain was launched in 2017, and it’s one of the first Proof-of-Stake blockchains to reach widespread popularity on the crypto market. Cardano uses a scientific, peer-review development approach, which involves scientific tests and evaluations of potential network upgrades before implementation.
Cardano can handle around 250 transactions per second, and the transfer fees are a fraction of a Euro on average.
Solana (SOL) is one of the fastest Proof-of-Stake blockchains on the market, with a theoretical throughput capacity of 710,000 transactions per second, and a proven capacity of 65,000 transactions per second. The project was launched in 2017, but the coin itself had its market debut in 2020. Because of its high throughput and low fees, Solana is often called an “Ethereum killer.”
Solana has since become one of the largest blockchains for launching and trading NFTs.
The Avalanche (AVAX) blockchain has one of the most interesting operating mechanisms among Proof-of-Stake cryptocurrencies because it actually uses three chains. The X-Chain, C-Chain and P-Chain, which are used for processing network traffic, exchanging assets, and hosting decentralized apps.
All three chains work in conjunction with each other to power the Avalanche network, which can process an average of 6,500 transactions per second.
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